Single Family Rentals versus Multi-family Rentals

[David Krulac]

In my county of 240,000 people there are currently 1,342 SFH and 52 MF (2 or more units) listed for sale. So there are many more choices of properties to purchase in the SFH category.

I have both SFH and MF, but also prefer singles. I would add a few more reasons:

1.  House tenants pay more utilities like water, sewer and trash than apt. tenants.  And take care of more maintenance like cutting the grass, shoveling the snow, we just had another snow yesterday, seems like there has been snow on the ground for months.

2. House tenants bring more of their own appliances. I usually supply range only in SFH but frig and sometimes washer & dryer in Apts. Less appliances mean less repair and replacement costs. I'm not in the appliance business.

3. Tenants do tend to stay longer, and vacancy is probably the most overlooked costs in being a LL. I also think that the more things a tenant brings like heavy appliances, baby grand pianos etc, the longer they stay because they don’t want to lug that stuff around.  I have some tenants for a decade or more.

4. When you go to sell the likely buyer will be an owner occupant. They will buy the house based on sales comps and not cap rate. In other words they will be buying at a retail price. Most won't have a clue even what a cap rate is. I can only recall once that I sold a SFH to an investor, all the other sales were to owner occupants in the retail market space. The houses that I'm buying are for the most part in owner occupant neighborhoods.

5. The last SFH I bought costs $34,000, last sale was $95,000 and is 1,800 sq ft and rents for $1,250.

6. Recently a commercial property sold here for $5 million, cash in like 20 days. Guess what the cap rate was? 5%

[David Krulac]

@Neil Schoepp 

Nothing wrong with 5 or more MFH.  You will have to get commercial financing, whereas on 4 or less you an get residential financing.  The Residential rates are a bit lower and you can get 30 year fixed.  With commercial you're probably looking at 5 year fixed, 30 amortization, then adjustable rate after 5 years.

5-20 is sort of a no man's land as a resident manager is not cost effective.  Once you get in the 20-100 range a resident manager can make sense.  Once you get 100+ then there is lots of competitive buyers in hedge funds, insurance  funds, pension funds etc.  

One strategy that can work is to buy a 4 unit, live in one unit, get FHA financing, then move after the year or so required for occupancy and do it again, rinse and repeat.